After nearly 30 years of declining interest rates created a prolonged bull market in bonds, one in which traditional fixed-income strategies prospered, times have changed.

In the nine years since the global financial crisis, conditions have frustrated fixed-income investors seeking both income and stability. After interest rates bottomed out and central banks’ programs of bond purchases tapered off, bond prices continued to drop, either constraining or negating the return of most traditional fixed-income strategies.

“When advisors come to us for consultation, it’s generally about the total portfolio, so our work involves asset allocation,” says Patrick Nolan, a portfolio strategist with the BlackRock Portfolio Solutions team. “We consistently hear now that it’s bonds that are making advisors pull their hair out.”

So it could be that advisors now find fixed-income solutions for their clients in unconstrained bond strategies, especially as rates rise. Unconstrained bond funds are enticing because they allow their managers to hedge against interest rate risk. Thus far, the Federal Reserve has raised rates six times since the global financial crisis.

Guggenheim Investments believes the Fed will continue with additional rate hikes to keep the economy from overheating, says Steve Brown, the firm’s director of total return portfolio management. Guggenheim believes the federal funds rate will rise to between 3.25% and 3.5% by the end of 2019.

“Our view on monetary policy is also more hawkish than the market,” Brown says. “The market continues to underprice the risk that the Fed will move faster. We foresee three more hikes this year, and up to four next year, which is two to three more than the market is predicting. That informs our duration positioning.”

Brown is the co-manager of the Guggenheim Macro Opportunities Fund (GIOIX), which held approximately $7 billion in assets as of May 4, according to Morningstar, and boasted five-year average annualized returns of 3.92%. It carries a 95 basis point expense ratio.

Guggenheim macro attempts to manage interest rate risk by looking at macroeconomic factors to decide its risk tolerance and by using the bottom-up analysis of individual bonds to select exposures. Currently, Brown and his team favor asset-backed securities and non-agency mortgage-backed securities.

While the Fed says it is committed to only two more rate increases for 2018, for a total of three, many economists and managers anticipate a fourth increase this year.

Elsewhere in the world, interest rates should remain low, says Rick Rieder, who oversees more than $1.8 trillion as global chief investment officer of fixed income for BlackRock. “Global monetary policy has a big impact on how we move within the strategy,” says Rieder. “We don’t think the [European Central Bank] is going to move for a long time; [we think] they don’t raise until well into 2019.” Nor does the firm think the Bank of Japan will raise its rates in the near term, or “maybe forever,” he says.

Rieder manages the $35 billion BlackRock Strategic Income Opportunities strategy (BASIX), which has offered investors 10-year average annualized returns of 3.98% and five-year average annualized returns of 2.21% as of May 4. The fund carries a 91 basis point expense ratio.

The strategy currently looks like a barbell, owning short-term U.S. Treasurys to control risk and emerging market debt to juice yields to create a consistent experience for investors over the long term.

While most central banks aren’t yet increasing rates, many are ending their purchases of government or corporate bonds as they pursue a policy of quantitative tightening. This increases the bond supply in the market, driving down prices and raising interest rates as a result, says Jeffrey Sherman, deputy chief investment officer at DoubleLine.

“I’m not saying tightening is going to cause a problem, but all these bonds have to find a home,” says Sherman. “That means it drives prices down and yields go up.”

Sherman currently co-manages the DoubleLine Flexible Income Fund (DFLEX), a $1.2 billion strategy offering one-year returns of 4.15%, more than three percentage points above the Bloomberg Barclays Aggregate Index. DFLEX carries a net expense ratio of 85 points for its institutional shares.

In DFLEX, DoubleLine focuses on short-duration, credit-sensitive assets to generate returns; 80% of its portfolio is allocated toward credit, while government bonds, agency bonds and mortgage-backed securities account for the remaining 20%. As the yield curve flattens, long-term bonds don’t yield that much more than those with shorter maturities, so investors aren’t compensated much for taking on duration risk.

Currently, the Fed estimates that its interest rates will not rise above the neutral rate until 2020, meaning that investors still have 18 months of relatively accommodative monetary policy acting as a tailwind for their portfolios. Because the impact of corporate tax cuts is expected to be a mostly near-term phenomenon, most of the response is being felt on the front end of the yield curve, says Sherman.

“Right now, you can get 206 basis points on the one-year Treasury bill,” he says. “That’s something you couldn’t do 18 months ago when the yield was 75 basis points. The idea is that the Fed, by raising rates on the front of the curve, is making short-term investing attractive because of the shape of the yield curve.”

Income can now be created with significantly lower risk than existed just 18 months ago, a phenomenon that many unconstrained managers believe will have significant impact on both debt and equity markets.

In the last half of April, the 10-year Treasury yield, used by many investors as the level of risk-free returns, crossed the crucial 3% mark for the first time since January 2014. As the front end of the yield curve creeps upward, investors like Rieder have found short-term Treasurys more attractive. The yield on two-year Treasurys recently crossed above the dividend yield of the S&P 500.

Still uncertain are the impacts that the Tax Cuts and Jobs Act of 2017 will have on the fixed-income market. Though fiscal stimulus late in a bull market should be inflationary, as of the end of the first quarter, inflation was in line with the expectations of central bankers.

Thus far, tax reforms have not produced the significant uptick in interest rates that many expected, nor has it produced a surprise upside in inflation. All told, Guggenheim expects tax cuts to add up to 0.5% to the U.S.’s 2018 GDP and core inflation to hew close to the Fed’s target of 2%.

Also of concern is the decision by Congress to add $1.5 trillion to the national debt to fund tax cuts and fiscal spending late in a bull market. “We’ve decided to finance tax cuts, and it’s going to be worse off for our debt burden over the long run,” says Sherman. “There are structural reasons that interest rates should go up because of the extra supply of securities that the U.S. will have to put into the market.”

Rieder believes that central banks will be able to navigate the difficulties of unwinding their balance sheets and work to keep market conditions calm.

With the gradual rise in interest rates, default risk is already climbing, as the cost to protect securities from default has gradually climbed over the past few years. Asset managers like BlackRock, PIMCO and DoubleLine have already recommended that investors start paring back holdings in investment-grade and high-yield corporate credits.

Since the end of the global financial crisis, during the period of the Fed’s zero-interest-rate policy and quantitative easing, long-only credit investors fared well, despite some intermittent periods of distress. However, many managers expect conditions to worsen in the future as a result of inflation.

“Investors have been investing under the same strategy for so long because it’s been low rates and low volatility,” says Kathleen Gaffney, vice president and director of diversified fixed income at Eaton Vance. “We’ve benefitted from the economic recovery with very low inflation. The idea of inflation coming back is not on most investors’ minds.”

Gaffney manages the Eaton Vance Multisector Income Fund (EVBAX), which had $460 million in assets as of May 4 and had offered investors five-year annualized returns of 3.77%. It carries a 97 basis point expense ratio.

Gaffney’s long-only fund is managed for total return and low volatility using a credit-oriented, bottom-up strategy. The fund is currently focused on currency positions and is holding a lot of cash, she says, but it has been able to use 25% to 33% of its credit exposure in emerging market debt to generate excess returns of 250 to 400 basis points above the Agg.

Generally, there seems to be some consensus among managers and analysts that inflation will rise slowly in the near term, allowing the Fed to continue its policy of gradual, well-telegraphed rate increases.

BlackRock currently estimates that core CPI, a key measure of inflation, will peak at around 2.5%, while the Fed’s preferred measure, personal consumption expenditures, or core PCE, will reach 2.2% in 2018. The low inflation amid economic growth stems from technology continually disrupting prices, Rieder says.

If growth and inflation were to continue, Gaffney believes that U.S. Treasurys could produce negative returns moving forward. “When inflation becomes more important, you start to think about your total returns,” says Gaffney. “For fixed income, with low rates at the high-quality end of the market, and low rates for taking additional credit risk in high yield or emerging market, the risk that inflation eats away at your total return becomes the more important risk for investors to think about.”

Market volatility is also a driver of interest rates: The S&P 500 just experienced its first quarterly loss in nearly three years and intransigent long-term interest rates finally began to creep up in April.

The ability of unconstrained managers to hedge credit risk or adopt short positions might appeal to investors facing down this future volatility and uncertainty. Gaffney says these funds are also managed by absolute return, “which implies a positive return every single year, which is very difficult to do.”

Rieder also sees more volatility in 2018.

And Guggenheim believes that as the economy reaches full employment, as interest rates rise and as wage inflation sets in, recession risks increase as corporate debt squeezes an increasing proportion of companies.

Investors should take caution, since managers may mis-time the market or make a wrong call that ends up destroying wealth, says Todd Rosenbluth, director of fund research at CFRA.

“There is a risk that these managers aim to zag when the market actually zigs,” says Rosenbluth. “Even though the Fed has laid out a road map for its rate hikes, they’re by their own words data dependent. It’s not clear how these funds will be constructed in the future and how the way the fund is constructed will serve the intention of the investor.”

Unconstrained strategies are so diverse, the funds defy easy definition, says Rosenbluth. Many funds, he adds, are so new they do not have long enough track records for sufficient analysis, and their short positions make it difficult to understand how the strategies are allocated.

Because some funds exchange interest rate risk for other types of risk, the nontraditional category ends up with a higher correlation to credit-sensitive investments and equity markets. According to Morningstar, non-traditional funds allocated more than one-third of their assets to bonds with below-investment-grade ratings.

Unconstrained strategies carry expense ratios averaging between 1% and 2%, according to Morningstar. That acts as a sandbag against potential returns since investors must clear the hurdle presented by their fees before they make money for their investors.

“We’re in and remain in a period where bond returns are going to be relatively muted,” says Rosenbluth. “The greater the potential returns, the greater the risk. The higher fee that is being charged to investors in these funds has and will continue to eat into their returns. If you’re charging 100 basis points or more over traditional core bond strategies, the bar is set very high for you to overcome and outperform a conventional strategy.”

However, with indexes like the Agg increasing in duration while still producing low yields, active strategies may be more desirable to investors, says Brown. “Active management in fixed income is a prudent way to invest,” he argues. “A fund like ours has had positive performance this year. With active management we think you can navigate this environment.”

Unconstrained funds could thus find a place in more portfolios as rising interest rates and equity market volatility force advisors to think creatively.